So far in Adventure Capitalist, I’ve combed the entire investment universe to bring you value and growth stocks with the highest return potential.
That list includes micro-caps, small-caps, miners, foreign stocks and everything in between.
And we’ve had a great run in recent years.
Last year, our portfolio booked a return of +41% vs. the S&P 500’s +12%. And this year through nine and a half months, we’re up 32%, while the S&P 500 is up 16%.
Here’s some of our best-performing closed positions over the last two years:
- McEwen Mining (MUX)… +217%
- Brazil Resources (BRI-V)…+266%
- Encana (ECA)… +83%
- Camtek (CAMT)… +50%
- Myers Industries (MYE)… +40%
And here are a few of our top-performing open positions (all added in the last 15 months):
- Glu Mobile (GLUU)… +125%
- AeroVironment (AVAV)… +83%
- PayPal (PYPL)… +66%
But today, I’m throwing you a curveball. I’m placing an emphasis on income.
Alternative income, specifically.
Well, maybe not that much of a curveball, because we’ve dabbled in this space before.
For instance, I wrote about P2P lending, StreetShares’ VetBizBonds, U-Haul’s U-Notes and real estate crowdfunding in previous issues. The reason I’m going back to it again is because I’m aware many investors are still starved for yield in this ultra-low-rate world.
This month, I’m going to unveil an unusual way to find sizable, hidden income in the stock market.
You see, over my career, I’ve made it a point to study one obscure area of the markets.
Special dividends are one-off payments. Companies pay special dividends when they want to return extra cash to shareholders, but they don’t want to cause a temporary spike in their regular dividend history … or they don’t want to initiate a regular dividend-paying expectation.
By nature, these are sporadic, non-recurring payments.
Yet, although they are irregular dividend payments, there’s a shortlist of companies that pay them with regularity.
The interesting part of this phenomenon is that the legion of yield hounds doesn’t know about — and don’t know how to find — these special dividend-paying companies.
First, these stocks don’t get much hoopla. Rarely, will you see a news story on a special dividend, unless it’s a one-off payment from a blue-chip company. And second, financial websites only report regular dividend yields. Stock screeners can’t compute this information because these types of payments are typically made at irregular intervals.
Here’s an example of what I’m talking about …
Capitol Federal Financial Inc. (CFFN) is a Midwest community bank that’s off most investors’ radars.
Source: Google Finance
Google Finance shows its dividend yield is 2.3%. (It’s the same at CNBC, MarketWatch, Yahoo! Finance and other leading financial websites.)
But, it’s true yield is “invisible.” Unless you’re willing to roll up your sleeves …
Check out its dividend history via this chart from the company’s investor relations section of its website.
CFFN has paid special dividends for 10 consecutive years (counting 2017). Its first special dividend payment was in 2002. Since then, it has paid a special dividend in 14 of 16 years. Sometimes, it pays more than one special dividend per year. (From 2011 to 2016, it paid two special dividends each year.)
In the last five years, its true yield (regular + special dividends) has averaged 6.6% instead of its reported 2-3%! Basically, CFFN’s real yield has been 3X its stated yield … if you knew how to locate the extra yield, that is.
That’s where I come in.
I’m confident I’ve done more research on special dividend stocks than any other analyst in the business.
To find the most consistent and meaningful special dividend-paying stocks in the market, I’ve combed through thousands of names … kept my own special dividend spreadsheet to track these peculiar companies … and enlisted the help of an expensive database (Compustat).
While the screening process is complex, the three things I look for are simple:
- Companies must pay special dividends with consistency.
- The special dividends must equate to a sizable extra yield.
- Total yield must be higher than the S&P 500’s yield.
Naturally, I also hunt for discounted valuations and some measure(s) of safety. Often, both are in place. Income-hungry investors can’t see their true yields, so they’re not overbought and valuations tend to stay low. And good cash flows are needed to support large bonus dividend payments.
Today, I’m giving you my exclusive watchlist of first-rate special dividend payers. They’re not all cheap, but all have been remarkably consistent payers of significant special dividends. (I’m adding one from our Adventure Capitalist portfolio.)
‘Sweet 16’ Special Dividend Stocks
I’ve recommended several of these stocks in the past with fantastic results.
Income seekers love the supercharged yields. But many of these “special” stocks have also generated considerable price appreciation.
For example, I recommended National Presto Industries Inc. (NPK) on April 3, 2014. NPK pays a small regular dividend and shows a stated yield of less than 1%. But, the company has paid massive special dividends for 14 straight years — accounting for an additional hidden yield of 6%. The stock has easily outrun the S&P 500, with dividends accounting for more than 35% of its total return.
I also recommended Diamond Hill Investment Group Inc. (DHIL) on March 14, 2014. DHIL’s reported yield is 0%. It pays no regular dividend. But, the company has been a serial payer of special dividends. It has rewarded shareholders with a special distribution each of the last 10 years. Its secret yield has averaged mid- to high-single percentages over that time. DHIL has doubled up on the S&P 500, with special dividends representing close to 20% of its total return.
More recently, I recommended Southside Bancshares Inc. (SBSI) to a former colleague of mine on Jan. 27, 2016. SBSI has paid a cash dividend every year since 1970… a special dividend every year since 2004 … and a 5% stock dividend every year since 1993. It has crushed the S&P 500 — along with three different forms of dividends — along the way.
There are more examples. But, you get the picture.
Now, not every company that pays consistent special dividends is an automatic buy. Some are too risky for my taste. However, as I just showed you, I’ve narrowed the field down to a “Sweet 16.”
Is there something magical about this list of special dividend-paying stocks beyond their unreported juicy yields?
Sort of. At least, many of them have the same favorable characteristics …
Most of these companies have attractive, financially sound business models that have embraced this extra form of shareholder friendliness. They have the ability to produce steady cash flows — and earnings — in most market environments. And if purchased at discounted valuations, they can reward shareholders with rising stock prices, too.
Today, I’m adding my favorite name from the “Sweet 16” list to our Adventure Capitalistportfolio.
My Top Special Dividend Stock:
Gluskin Sheff + Associates Inc. (GS.TO)
Description: Founded in 1984, Gluskin Sheff is a Canadian wealth management firm. It manages portfolios for investors, including entrepreneurs, professionals, family trusts, charitable foundations and estates.
Each $1 million invested by the firm’s clients into its first equity model back in 1984 has grown to $30.7 million vs. $16.3 million for the S&P/TSX Total Return Index.
Gluskin Sheff has grown its assets under management at a compound growth rate of 19.3% since its inception (very close to the same numbers Warren Buffett has recorded).
The stock trades on the Toronto Stock Exchange under the symbol “GS.”
Market Capitalization: Gluskin Sheff is a micro-cap stock. It has a market cap of $495 million.
Regular Dividend History: GS.TO pays a quarterly dividend of 25 cents per share. It has a stated yield of 5.9%.
Source: Yahoo! Finance
Special Dividend History: GS.TO’s true yield (regular dividends + special dividends) over the last five years has averaged 12.8%.
The company has paid a special dividend each of the last nine calendar years. From 2008 to 2016, it has made a dozen special dividend payments in addition to its regular dividend payments.
It also just paid an 85-cent special dividend this month. While we missed that one, we should be able to capitalize on many more to come.
Discounted Valuation: GS.TO has a price-to-earnings (P/E) ratio of 11.5. In contrast, the S&P 500 has a P/E ratio of 25.5 and the asset management industry has a P/E ratio of 20.3. This means GS.TO is 55% cheaper than the overall market. And the stock is 43% cheaper than its asset manager peers.
There has been some support in the $15 to $16 range — where GS.TO is trading today — over the last couple years. As you can see from the chart below, the stock has bounced back nicely from these levels on more than one occasion.
Safety Factors: Gluskin Sheff has no debt and $81 million in cash on its balance sheet. That cash level represents over 16% of its market cap. And it allows management to pay big bonus dividends, buy back company stock and provide a cushion for off years.
The company also has a diversified asset mix. Its investment strategy breakdown, by assets under management, includes 45% in equity, 42% in fixed income and 13% in alternatives. So, it’s not dependent on the equity market like many other asset managers.
Senior management and employees own 17% of all common shares outstanding. And they are among the largest clients of the firm’s investment portfolios. This means high-level executives “eat their own cooking.” Since their interests are aligned with those of everyday investors, they have incentive to grow the company, collect their own special dividend payments and deliver strong stock performance. Numerous studies have shown that stocks with high insider ownership perform better than stocks without.
My return outlook is as follows…
As long as Gluskin Sheff continues doling out whopping special dividend payments, we could make over 10% per year (off dividend yield alone) if the stock price just stays where it is.
But, GS.TO is also undervalued right now. I think we could see a short-term pop in the range of 15% to 25%. Beyond that, GS.TO’s stock price has the potential to rise in the neighborhood of 50% over the longer term, as it trades closer to its industry’s multiple.
Action to take:
Buy to Open Gluskin Sheff + Associates Inc. (GS.TO) at C$16.75 or better.
Once establishing a full position, set a 35% hard stop.
Editor’s Note: I recommend buying Gluskin Sheff on the Toronto Stock Exchange in Canadian dollars under the ticker GS. It is also available on the Over-The-Counter market under the symbol GLUSF, but has less liquidity and wider spreads.
For example, the Toronto-listed version of Gluskin Sheff trades an average 80,000 shares per day. Yet, the OTC version trades an average of less than 1,000 shares per day.
Please use a limit order when purchasing shares.
Altering Two Stop-losses…
As I showed you earlier, two of our shorter-term positions have taken off like gangbusters.
Glu Mobile Inc. (GLUU), recommended a year ago, has skyrocketed 125%. And AeroVironment Inc. (AVAV), which made its way into our portfolio just six months ago, has soared 83%.
I’m switching our stop-loss discipline on both positions — moving them from 35% “hard stops” to 15% “trailing stops.”
Both 15% trailing stops will be effective from today’s closing prices.
This move protects a significant chunk of our large gains, but also allows these stocks to run even higher. Remember, a “trailing stop loss” automatically adjusts higher as the value of the underlying stock climbs.
It’s an easy decision when you’re sitting on huge unrealized gains.
If you agree, here’s what you can do …
Actions to take:
Change your stop-loss on Glu Mobile (GLUU) from a 35% hard stop to a 15% trailing stop.
Change your stop-loss on AeroVironment (AVAV) from a 35% hard stop to a 15% trailing stop.
Our Other ‘Sweet 16’…
Since I’m on the topic of “Sweet 16,” even with March Madness a ways off, it’s worth reviewing the performance of our other “Sweet 16.” It’s been a full year since I attended The MicroCap Conference in Philadelphia, where I presented my “Sweet 16” micro-cap stocks. Performance of this handpicked group has been outstanding:
- 11 of 16 picks (69% win-rate) have generated positive returns.
- Biggest individual winners: +150% (22nd Century Group, XXII), +112% (Grande West Transportation Group, BUS.V), +91% (OurPet’s, OPCO), +74% (Promis Neurosciences, PMN.TO) and +69% (Cancer Genetics, CGIX).
- Average return of +28.2% for all 16 picks. That beats large caps (SPY, +19.6%), small caps (IWM, +16.9%) and microcaps (IWC, +18.5%) over that period.
I hope you have been able to profit from these bonus selections.